Is it time for investors to give up on Japan?

Predictions of a Japan recovery always end in disappointment. Should investors
cut and run?

Investors would be forgiven for raising a wry smile at the suggestion this week by leading British fund broker, Hargreaves Lansdown, that now is a terrific time to invest in Japan.

In the firm's latest newsletter, its head of research, Mark Dampier, suggests that adventurous investors might want to dip into Japan to make some healthy profits, and he names Invesco Perpetual Japan as his fund of the week.

A financial adviser tipping the recovery of Japan could almost be a scene out of the film Groundhog Day, in which actor Bill Murray wakes every day to the same call. Only here it's investment professionals extolling the virtues of Japan over and over. We have been here many times before.

Mr Dampier's tip comes in a week when the Nikkei took a dive again. Indeed, rather than wondering whether now is the time to be buying Japan, shouldn't investors be wondering whether they should cut and run?

After all, the average Japan fund has had negative returns for 12 out of the past 20 years, losing 39pc in 1990, 21pc in 1995, 30pc in 1999, and 14pc in 2005.

If you had invested £2,000 in the average Japan fund two decades ago it would now be worth just £320 more, compared to a FTSE tracker, which would have more than doubled your £2,000. Of the 35 Japan funds that you could have invested in a decade ago, not one would have made a positive return.

Mr Dampier said: "I last tipped Japan heavily in 2004 and 2005. I tipped J P Morgan's fund and it's a mistake that will stay with me. I regret it, but I wasn't the only one.

"For people who followed my advice in 2005 I would say stick with it. If they don't like Japan they've probably already left and where else are you going to invest? Emerging markets? They're already overinvested, and if there is a global double crunch they will be hit harder than Japan.

''Look at what happened to tech, that was overinvested and when it failed, it hurt."

Adrian Lowcock, at Bestinvest, said that his firm has always recommended some exposure to Japan. "However, since we reviewed our strategy in 2001 we have decreased our recommended exposure from 9pc to 6pc. This is because we believe the investor can benefit from Japan long term, but that there are fundamental concerns about the present situation. We much prefer Asia Pacific in general to Japan."

Japan has suffered more than other markets in the global recession as the majority of the economy is based on exports, particularly to the US.

It can't fall back on domestic growth as much as other economies and so global pessimism can badly impact Japanese markets.

"Global sentiment is currently depressed," said Andrew Rose, manager of the Schroder Tokyo fund. "So Japan is too. If this is a mid-cycle slowdown, then Japan will recover. But if we're headed for a worldwide double dip, then Japan will suffer."

So is there any reason why investors shouldn't just cut their losses and get out now?

According to Paul Chesson, manager of Invesco Perpetual's Japan fund, which tops the best 10-year performance tables, it's all about timing.

To be fair to Mr Chesson, he has been a long-standing bear – rather than talk up the case for investing in Japan (which you would expect from someone running a Japan fund), he has tried to talk people out of it for the best part of a decade.

In 2002, he said after the Nikkei bounced that it was "a false dawn''. And again in 2006, he said that valuations were "too high'' to be a bull. He was right both times.

"People usually sell Japan at the low points, and are all over it like a cheap suit when it has gone up for a couple of years. Last time everyone recommended it was 2006 when the market was 100pc higher than it is today.

"If you buy on a high you'll be disappointed," said Mr Chesson, who says valuations are a key factor today. "The market was too expensive 10 years ago, but now it's too cheap. A fund manager only invests in 30 companies, not the whole market, so he can still perform well even if the market does not."

Mr Chesson's change of heart is the main reason why some investors are optimistic.

Mr Dampier added: "When I last invested in Japan a few years ago, Paul Chesson actually said don't invest in Japan, which is one of the reasons I am listening now, because he is saying do, and he's actually putting his own money where his mouth is."

Deflation has long been a factor in Japan, but Mr Rose said this should not concern the investor too much.

"It has been tackled several times over the past 10 years, but I invest in companies, not politicians, and these will succeed."

Although Japan may be geographically linked to the big emerging markets of China and Russia, economically it could not be more different.

Japan is a developed market and so does not have the same room for exponential growth that its neighbours have experienced in the past decade – and are expected to continue to have.

Japan has an ageing population that is shrinking, meaning that the number of domestic consumers is falling.

But while comparisons with Chinese markets might be unfair, their proximity to one another does have its benefits.

"China used to be a cheap manufacturer, now they're a consumer of exports. I invest in Japanese companies that sell into emerging markets, such as car and television manufacturers, and producers of household goods, cosmetics and detergents," said Mr Rose.

Japan's lack of domestic growth is also not a concern for Mr Chesson. He invests in companies that are undervalued. He stresses that he picks companies, rather than invests in sectors or the stock market as a whole.

"I have no problem investing in a company that can only experience recovery rather than long-term growth," said Mr Chesson.

Gavin Haynes, at Whitechurch Securities, who has advised on Japan funds since the 1990s said that Japan has not always been a lost cause – he reckons that investors who bought some funds five years ago will still have made positive returns. He also reckons that existing investors should sit tight.

"Five years ago, we recommended the Jupiter Japan Income fund at launch, based on the potential to exploit dividend-producing companies in Japan and the fund has produced a positive return since launch in September 2005, despite heavy falls in the index.

"Although the Japanese stock market remains an enigma, I believe this market is long overdue for a rally.

Mr Haynes has been adding Japan funds across our portfolios for clients seeking long-term growth. "I believe a weakening of currency could prove a catalyst to see this market outperform," he added.

Investors chasing the Japan recovery may take Mr Haynes's comments with a pinch of salt. If you have been an investor for a prolonged period you might be able to continue to afford to wait for a recovery. If you are feeling brave, then funds tipped by advisers besides Invesco's fund include GLG Japan Core Alpha, Jupiter Japan Income and JO HAMBRO Japan

But any cynicism you may have is more than warranted. As Mr Dampier said: "I don't blame anyone who gives up on Japan."